SOUND BITES FROM WHAT WE’RE HEARING… --Railroads (Market Weight): We received a heads up from a contact in the Senate about next week's upcoming transportation nomination hearings, including that of President Obama's appointee for Chairman of the STB, Daniel Elliott. Mr. Elliott was the associate general counsel for the UTU and was nominated for the position of Chairman of the STB on July 6th. The full Senate Committee on Commerce, Science and Transportation has scheduled confirmation hearings on Wednesday, July 29th. Other appointees besides Mr. Elliott who will be considered for confirmation include Christopher Bertram to be Assistant Secretary for Budget Programs and CFO at the U.S. Department of Transportation, Christopher Hart to be a Member of the National Transportation Safety Board and Susan Kurland to be Assistant Secretary for Aviation and International Affairs at the U.S. Department of Transportation. We do not anticipate any slowdown in the process, and we believe it is now possible that Mr. Elliott and the others could be confirmed as early as the next few weeks, prior to the Senate's August recess.

--Trucking (Market Underweight): We spoke with a bankruptcy attorney with pension experience about implications of a potential YRCW bankruptcy for other Teamster employers and issues regarding capital structure seniority. When we asked about the risk that other contributors (such as ABFS) to YRCW’s multiemployer pension funds could be required to help shore up the funds following a large potential shortfall, this attorney’s opinion was that this discussion would be between the union and the employer; thus, it would require a new negotiation between ABFS and the Teamsters [We searched the NMFA and found no provisions for additional pension contributions upon the default of another contributor, and we believe there is very little chance of any such negotiations prior to the current contract’s expiration in early 2013—Wolfe Research comment]. As far as a potential clawback for UPS following its $6.1B withdrawal from Central States in late-2007, our contact saw this as a low probability given ERISA legislation which only provides for such a clawback if all employers withdraw from a particular multiemployer pension at once. This attorney also confirmed that YRCW’s multiemployer pension obligations would largely be treated as unsecured obligations in bankruptcy court, with the exception of pension accruals made 180 days prior to the hearing (or the bankruptcy filing if operations cease), which are considered administrative or priority claims and would be senior. Our contact explained the labor contract would be renegotiated in bankruptcy court, and while he was not familiar with the specifics on this case he noted a normal payout on unsecured claims in bankruptcy court is 10 cents on the dollar. This attorney also saw these unsecured pension claims as pari passu (in line) with YRCW’s unsecured debt.

--Railroads (Market Weight): We spoke with a large building products shipper about recent pricing and demand trends with the Class I rails. Our contact’s volumes are currently tracking down about 50% y/y, as trends have deteriorated throughout the year. This shipper sounded optimistic that the worst of the volume declines could be behind us, but he also acknowledged that inventories, while down to yearly lows of roughly nine days for him and three days for his customers, still remain about one day above target levels, a sign that inventory destocking is not yet over. On the pricing side, our contact has seen a definitive change in the rails’ approach to contract renewals since the beginning of the year. The western rails were a lot tougher on pricing in the beginning of the year, but their tone has moderated. Specifically, UNP suspended negotiations with this shipper at the beginning of the year, hoping that the economy would firm by now, but since the economic weakness persists, UNP has now returned to the table with more realistic expectations. Previously, UNP was looking for rate increases in the low-single digits, but this shipper expects the contract to renew with flat rates at worst, and that pricing is likely to be down in the low-single digits, net of fuel, partly because this facility is dual-served, allowing this shipper to get a competitive bid from BNI. During C10, our contact expects his rail rates to be up 3%-5%, but if the freight recession continues at current levels, he would not be surprised to see rail rates closer to flat or up low-single digits for the year, as the rails compete with each another, as well as trucks, for increased volumes on their networks.

--Airfreight & Logistics (Market Underweight): We spoke with a large international manufacturer regarding current freight trends and bid activity. Of this shipper’s $100M annual transportation spend, roughly half is dedicated to his small package business, split 70/30 domestic and international. Last year, this shipper divided his small package spend between UPS and FDX and had experienced equally high service ratings for both parcel carriers. However in the second quarter of this year, the company decided to rebid the full small package contract in efforts to consolidate volumes and manage costs through rate reductions. Both UPS and FDX bid double-digit y/y rate decreases, however FDX was more aggressive and won the multi-year deal. This shipper’s new contract includes fuel surcharge caps and discounts on published surcharge rates as well as minimal rate escalators in the subsequent years of the contract. This shipper like many, has focused on rate management to offset depressed sales as 2Q volumes declined 23% y/y, down from -19% y/y on average in 1Q. At these volume levels, this shipper has not even begun to consider 2009 inventory restocking and plans to commence restocking with overall economic improvement which he hopes for in the first quarter of 2010.

Note: Each of the comments above represents the viewpoint of a single shipper or industry contact. They are not necessarily representative of the overall market and do not necessarily reflect the opinion of Wolfe Research unless specified.